United States District Court, D. Massachusetts
MEMORANDUM AND ORDER
B. Saris Chief United States District Judge.
owners and operators of Nick's Famous Roast Beef in
Beverly, Massachusetts, have been indicted in an alleged tax
evasion scheme. The scheme purportedly involved the
defendants underreporting cash income generated at the
restaurant during the 2008-2013 tax years and subsequently
fabricating cash receipts during an IRS audit. Defendants
Nicholas Koudanis, Eleni Koudanis, and Steven Koudanis have
moved for a Franks hearing and to suppress evidence
gathered by the government during the December 11, 2014
searches of the restaurant and the Koudanis residence. The
defendants argue that the affidavit submitted in support of
the search warrant application contained material
misstatements and omitted material information that the
affiant either knew about or could have learned if he had
performed a further investigation. Because the defendants
have not made a substantial showing (1) that the affiant
acted intentionally or recklessly with regard to the alleged
misstatements or omissions and (2) that probable cause would
be lacking had these misstatements been excluded or the
omissions included, the defendants' motion for a
Franks hearing and to suppress (Docket No. 65) is
Famous Roast Beef (Nick's), located in Beverly,
Massachusetts, opened in 1975 and specializes in roast beef
sandwiches and fried foods. Nicholas Koudanis (Koudanis) and
Nicholas Markos (Markos) each own one-half of the restaurant
and are responsible for the restaurant's daily
operations. Eleni Koudanis, Nicholas Koudanis's wife,
manages the business's books. Steven Koudanis, son of
Nicholas and Eleni Koudanis, works in the restaurant.
December 9, 2014, Magistrate Judge Page Kelley issued
warrants to search the restaurant and the home of Nicholas
and Eleni Koudanis. The warrant applications relied on an
affidavit prepared by IRS Special Agent William Noonan. Agent
Noonan presented the following facts in his affidavit to the
on Noonan's investigation, Nick's received gross cash
income far in excess of what it reported to the IRS. Noonan
stated that the defendants sought to conceal these tax
underpayments in two ways. First, Nick's is a cash
business. It only accepts cash and it has an ATM for
customers to use. It also pays for many of its roast beef
shipments in cash. This allows Nick's to declare that its
expenses are less than they actually are. By declaring less
in the way of expenses, Nick's can more easily justify
its underreporting in the way of income. Second, and
relatedly, the defendants use a second cash register to
fabricate cash receipts. The fake receipts, showing less
income than was received, were then used to prepare
Nick's tax filings.
estimated that Nick's gross receipts were approximately
$2 million more per year than it reported on its tax returns.
Noonan learned that this additional income was used by
Koudanis and his sons to purchase real estate, nearly $800,
000 of which was paid for in cash, far in excess of what they
reported as income on their tax returns.
reaching these conclusions, Agent Noonan relied primarily on
two confidential informants (CIs), with corroboration from
other witnesses, documents, and photographs. Each CI
independently contacted the IRS Whistleblower Office about
the alleged tax fraud. CI 1 submitted his tip in April 2010.
CI 2 submitted her tip in September 2012.
Confidential Informant 1
described CI 1 as experienced in the restaurant and
restaurant supply business. In 1969, CI 1 began working for a
sandwich shop chain. He worked at the company's main
office, where franchisees purchased their food supplies. In
1978, after nine years in this position, CI 1 purchased the
food supply arm of the business. For nearly twenty years --
from 1978 to 1996 --CI 1 owned and operated this food supply
business. During this period, he grew the business from $2
million in annual sales to $14 million in sales by adding
numerous pizza and roast beef shops as clients. In 1996, CI 1
closed the business because of increased debt and other
after, Agar Supply Company hired CI 1. When CI 1 joined Agar,
he brought with him many of his former clients. Many of those
clients requested that they be permitted to continue paying
part of their orders in cash. Prior to the time CI 1 joined
Agar, nearly all of CI 1's clients used two separate
accounts for food supply purchases: a cash account and a
check account. The clients would report only purchases made
by check on their tax returns. Purchases made in cash went
unreported to the IRS. When CI 1 joined Agar, many of the
clients he retained sought this same treatment from Agar.
Ultimately, in 2002, Agar gave CI 1 its blessing to use cash
accounts in hopes that it would drive up sales. CI 1 provided
Noonan with copies of Agar records confirming the cash
account practice. CI 1 stated that Agar employed the
two-account system from at least 2002 to 2006.
implementing the two-account system, Agar hired additional
salespersons to oversee the increased demand. In 2004, Agar
hired Flora Papadopolous, who had previously worked in a
roast beef restaurant for many years. In 2005, Agar hired
another employee, Paula Hios. Hios also had experience in the
roast beef business. Based on conversations with Papadopolous
and Hios, CI 1 told Noonan that the two-account system
continued after he was fired in 2006. He estimated that
nearly 70% of Agar's clients paid some portion of their
bills in cash.
was one of Agar's clients participating in the
two-account system. Nick's has been an Agar client since
2003. CI 1 told Noonan that, as of 2006, Nick's was
purchasing between 50 and 60 boxes of roast beef per week
from Agar. Agar delivered four shipments per week to
Nick's; three of the four were paid for in cash. Based on
CI 1's experience, he believed that Nick's generated
$1, 000 in gross cash sales per box per week for a total of
$50, 000 to $60, 000 each week in 2006.
CI 1 no
longer works at Agar; he was fired from his position in 2006.
CI 1 explained to Noonan why he had been terminated. CI 1
said that Agar told CI 1 that he had not followed the
company's policy requiring salespeople to deposit all
cash received from customers within twenty-four hours. Agent
Noonan explained in his affidavit that CI 1 was angry at Agar
after it fired him. CI 1 stated that he went to work for
Agar's competitors, but that his former clients declined
to change suppliers. Noonan also noted that CI 1 stated that,
in addition to any financial reward he might earn from his
whistleblower tip, he hoped that the investigation would
negatively affect Agar. Noonan ran a criminal background
check on CI 1 and found only an OUI from 2012.
April 6, 2014, CI 1 called Hios, a former colleague of CI
1's at Agar. The call was recorded. In September 2012,
after CI 1 was fired, Reinhart Foodservice, LLC, acquired
Agar. Reinhart is one of the largest food distributors in the
country. At the time of the 2014 phone call with CI 1, Hios
worked for Reinhart. CI 1 asked Hios if Reinhart had
maintained Agar's two-account system after the
acquisition. Hios replied that some clients continued to use
cash accounts, but no new clients were afforded the option.
Hios stated that she believed the two-account system posed a
significant audit risk for Reinhart's customers,
particularly because Reinhart tracked total purchases,
including payments made in both cash and check.
17, 2014, CI 1 met with Hios and her cousin, Peter Belesis.
The meeting was recorded. Belesis also worked for Reinhart.
Belesis traveled to Reinhart's client roast beef shops
and advised them on how they can improve their operations.
Prior to joining Reinhart, Belesis himself owned two roast
beef shops. Based on these experiences, Belesis estimated
that the food cost at a roast beef restaurant constitutes
approximately 45% of the shop's total expenses. Belesis
stated that roast beef cost about $2.50 per pound. Hios told
CI 1 that, as of 2014, only a few restaurants still used a
cash account at Reinhart. Nick's was one of the remaining
few. Based on the recorded conversation with Hios and
Belesis, Agent Noonan concluded that Nick's was doing
$60, 000 to $70, 000 in business per week and, because the
company made $1, 000 in sales per box, Nick's was
purchasing 60 to 70 boxes a week in 2014 (as opposed to
between 50 and 60 in 2006 when CI 1 was still at Agar).
Confidential Informant 2
Noonan's second principal source was CI 2. Noonan stated
in his affidavit that CI 2 is a relative of the Koudanis
family. CI 2 had visited the Koudanis residence in Topsfield,
Massachusetts, on multiple occasions.
the summer of 2012, CI 2 personally overheard two of
Koudanis's adult sons, Steven and Costas Koudanis,
discussing how to use a second cash register to generate
false cash receipts. The fake receipts were to be used in
case of an audit. CI 2 also heard one son state that the
fabricated receipts had previously proven useful during a
Massachusetts Department of Revenue audit. One son explained
that the Koudanis's former accountant had formulated the
idea to produce a false set of cash receipts many years ago.
The son said that Nick's had been doing so ever since.
saw the second cash register for the first time sometime
before the summer of 2012. The register was located in the
empty storefront adjacent to Nick's. While at Nick's,
CI 2 witnessed employees traveling back and forth between the
two storefronts. After watching this, CI 2 went in the
neighboring space and saw the second register.
also saw the second cash register at the Koudanis residence
multiple times in 2012. Typically, the cash register was in
the basement on a small table next to a trash bag full of
receipts. Noonan attached to his affidavit copies of
photographs taken by CI 2 that showed the register and the
trash bag of receipts. CI 2 took the photographs in July
2012. When CI 2 last visited the Koudanis residence, in May
2013, the register was there.
one visit to the Koudanis home, CI 2 saw the register on
Steven Koudanis's desk in the Koudanis's basement.
Steven was sitting at the desk keying in information.
According to CI 2, Steven spent much of the day entering
numbers into the register.
also learned -- from one of Koudanis's sons and from her
own observations -- that Eleni Koudanis maintained Nick's
financial records. Eleni kept all records on paper. Eleni had
previously worked at a credit union and was experienced in